Therefore, if investors place $1,000 in a business and the operating profit over a year is $200, the roi can be expressed as being 20%. Some examples of the returns achieved by companies in 2006 and stated in their annual reports are bp (an oil company) 22.0% and Anglo American (an international mining company) 32.4%. Topping these is Nokia (a Swedish mobile phone manufacturer) that announced a return of 45.8%.
Generating a "superior" return is to achieve an roi that is greater
than the rate achieved by businesses running similar activities in similar
markets, and so to be successful is to generate a return that is at least
as good as that achieved by your competitors, but ideally better than
them.
A "sustainable" superior return is perhaps the most diffi cult objective
to achieve. It means generating a superior rate of return year in, year
out. A business may be flying high when its products or services are
in fashion. But the fall can be swift when it's products or services are
no longer in vogue and the business has gone from producing superior
returns to producing inferior ones.
To be sustainable is to continuously develop the business proposition in a way that keeps customers buying
the company's products or services in preference to those of it's competitors.
Innovation, technology and cost reduction are all activities that can
help maintain a sustainable return.
For example, the returns generated by Nokia result from a preeminence
in a growing market coupled with an ability to continue to introduce new
technology and ignite passion for the company's latest products. If Nokia
fails to offer leading technology and its cost base rises, the superior returns
of today will be not be sustained.
On creating a superior roi the directors of a company have two
choices. They can either distribute the wealth to the investors or retain
it in the business. The second option depends on whether the directors
can identify further investment opportunities that will create even more
wealth in the future. In practice profi ts are retained in a company while
investment opportunities are identifi ed. However, this is only in the short
term as investors (particularly in public companies) will demand the cash
be "earning or returning".
Wealth is created for investors in a business in one of two ways:
. annual income - a distribution of profi t to the investor (by way of
a dividend);
. capital growth - a reinvestment back in the business to increase its
value (share price).
Shareholder value
The phrase "shareholder value" is also used to describe success.
Two definitions of shareholder value are:
. a concept that focuses strategic and operational decision making
on steadily increasing a company's value for shareholders;
. maximising shareholder benefit by focusing on raising company
earnings and the share price.